Limited Brands Earnings Call NUGGETS: BBW Operating Margin, Improved Merchandise Margin

On Thursday, Limited Brands, Inc. (NYSE:LTD) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

BBW Operating Margin

Dana Telsey – Telsey Advisory Group: As you think about the operating margins both at Victoria’s Secret and BBW, the strength of the BBW operating margin was very impressive. How do you see operating margin trends going forward as you break it down between gross margin and SG&A both at Victoria’s Secret and at BBW, especially given that Victoria’s Secret the influence of PINK continues to gain traction and that’s also impressive?

A Closer Look: Limited Brands Earnings Cheat Sheet>>

Stuart Burgdoerfer – EVP and CFO: Dana, obviously, the different businesses are in somewhat different positions, but as we think about Victoria’s Secret in the United States and Bath & Body Works in the United States, we believe that they have similar potential on an operating income rate basis. As we look at it today, obviously, the operating income rate at BBW is higher; but as we think about the opportunity over the next two or three years, we see that Victoria’s has significant opportunity to continue to improve its operating income rate. As you know, it’s significantly improved its rate over the last two or three years and we see potential for further improvement in the OI rate.

Improved Merchandise Margin

Janet Kloppenburg – JJK Research: For Stuart, I was wondering if you could talk about your guidance for an improved merchandise margin in the core business for the year, I think in price an improved merchandise margin in the fourth quarter. Maybe you could talk about that by brand and what factors are leading to a change in the gross margin direction? For Sharen, I was wondering if you could just talk at all about beauty initiatives that you’re taking to help that business firm up. Thanks so much.

Stuart Burgdoerfer – EVP and CFO: With respect to the merchandise margin rate, for the whole year, as I indicated in the prepared comments, for the whole year, we expect that merchandise margin rate for the business in total to be about flat. As Sharen outlined, some pressure in Q2 at Victoria’s; I expect the rate to be about flat in Q3; but again on a whole year basis, expect merchandise margin rate to be about flat and we expect some leverage on the (B&O) line which is in gross margin.

Janet Kloppenburg – JJK Research: So, for the fourth quarter, merchandise margins would be flat as well?

Stuart Burgdoerfer – EVP and CFO: We would expect merchandise margins to be up in the fourth quarter.

Janet Kloppenburg – JJK Research: Could you talk about what would drive that Stuart, please?

Stuart Burgdoerfer – EVP and CFO: It’s going to be a function of a lot of things as you would understand, Janet. But certainly, the year-on-year cost impact will be a contributor. But also as we continue to control inventories well and read and react and maximize full price selling, we would expect that those will also be key drivers in improving the merchandise margin rate.

Janet Kloppenburg – JJK Research: Will the gift with purchase – merchandising be as high or equal to last year in the fourth quarter?

Sharen Jester Turney – CEO and President, Victoria’s Secret: It’s Sharen. Right now we’re planning the same amount of circulation, but what we’ve been seeing in terms of the reaction that we’re seeing is very high, we continue to see that as we go forward. Our gifts with purchases continue to get stronger and stronger from a quality perspective, from the reaction to the customer and we do see them with as the brand building.

Janet Kloppenburg – JJK Research: On beauty?

Sharen Jester Turney – CEO and President, Victoria’s Secret: I’m very excited about the work that we’re doing to reposition our beauty business. You’ll see more of that in spring 2013. As we continue to focus on our fine fragrance business, which has been growing at double-digit rates as we actually last year restaged Fantasy and then we have some outdoor interesting concepts that will be coming out in beauty.

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